The Alternative to CSR: Regulation?

Corporate social responsibility is more than “doing well by doing good.” Companies have found that implementing measures related to environmental, social and governance (ESG) issues make for a solid business case as well. Consumers have become more aware of the impacts that their favorite products have on the planet and people, and are pressuring companies to respond in kind. CSR approaches are hardly monolithic: some companies focus on taking care of their employees and communities, like Ohio-based Smuckers. Others, like Timberland, educate their consumers on the where, why and how their products are manufactured, and work with their vendors to improve working conditions and economic opportunities for their workers. Many companies follow a reporting standard like that of the Global Reporting Initiative; others simply maintain a portal or issue an annual report.

University of Michigan professor of business administration Aneel Karnani believes, however, that for companies to act in the public interest, while profiting from their operations, is “fundamentally flawed.”

Professor Karnani claims that doing what is best for society comes at a price tag, the sacrifice of profits. And since executives are hired with the goal to maximize profits, they cannot act against the shareholders’ interests—or else, quite simply, they will be fired. Hence the problem of greenwashing arises: companies often just respond by saying they do a lot about corporate responsibility issues, but actually do nothing.

Karnani has a point. Companies do what they want because in the end, they are responsible primarily to their shareholders. Under US law, companies have to maximize shareholder value—if they do not, they can be accused of breaching their fiduciary duty. The Ben & Jerry’s acquisition by Unilever years ago is a case in point—the Vermont outfit’s owners did not want to sell, but really had no choice because they would have faced an expensive lawsuit they surely would have lost. States like California have considered a workaround, such as an H Corp or B Corporation, which would allow companies to set concrete CSR objectives as part of the company’s mission. Currently, you are either a company or a non-profit, with no compromise between the two possible.

But Karnani’s solution? More government regulation.

The problem with solely relying on regulation is the constant friction between the private and public sectors. Many regulators do not have the private sector experience or an understanding of the context under which businesses operate—so a new regulation can either be too oppressive or not go far enough. Some would simply counter--and smirk while doing so--that in the US, the private sector already has too much say with the strength they have in lobbyists and the cash on hand to pay them. Powerful business interests such as insurance and energy spend heaps of money on lobbying because of the exponential gains they receive in return. Business and government really should be genuine collaborators, not adversaries, and definitely not partners in corruption.

Furthermore, increased regulation is not a solution because businesses respond quite well to regulations they deem harsh: they pack up and move. Whether it is a big box store moving across a city border to avoid higher taxes, a factory across a state line to avoid unions or environmental regulations, or an entire supply chain across an ocean to manufacture products without any social or environmental concerns, businesses can and will respond to regulations with a moving truck and a ship. But even that is changing: an abuse in a factory, revealed with a tiny video camera and a Twitter account, can embarrass a company—hence the pragmatic embrace of CSR. It is better to be proactive and genuine than post pictures of flowers and polar bears on a web site--and then suddenly get exposed and embarrassed, and see a drop in sales.

Karnani equates that “social responsibility is a financial calculation for executives,” which makes CSR a lost cause. But as CSR consultant Elaine Cohen states:

Yes, there is an element of sacrificing short term profit for greater long term profit, which continues to be in shareholder real interests. Talk to Ray Anderson of Interface, Stuart Rose of Marks and Spencer, Jeff Immelt of GE and many others, and they confirm that CSR-type activities repay themselves many times over.

In the old days, companies would just create a philanthropic organization and let the spouse or cronies run the show, making donations and grants here and there. Now, companies have become increasingly transparent about their business practices, and are making more moves to improve factory conditions, reducing energy consumption, or sourcing more environmentally responsible materials. It is a trend that should be encouraged. And while Professor Karnani brings up some valid concerns, his view that CSR is a waste of time is short-sighted.